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Why 95% of Traders Fail

Summers Grades Janet Yellen's Fed Performance 'Incomplete'

Interest-Rates / US Federal Reserve Bank Oct 07, 2015 - 01:50 PM GMT

By: Bloomberg

Interest-Rates

Former Treasury Secretary Larry Summers joined hosts Stephanie Ruhle and David Westin on Bloomberg TV's new flagship morning program, Bloomberg <GO>. He discussed the economy, the 2008 financial crisis, and Janet Yellen's job performance as Federal Reserve Chair.

On what grade he would give Janet Yellen, Summers said: "I'd give her an incomplete because the term is not yet over. But she's done, as I say, I've got great respect for Janet Yellen."


On whether there should have been criminal prosecutions for the 2008 financial crisis, Summers said: "There clearly were a lot of outrageous things that happened. If there were people who could plausibly found guilty beyond a reasonable doubt, they should have been prosecuted, rather than their companies being prosecuted. Whether there were such people and prosecutors just didn't pursue the case or whether in extremely complicated situations you know that something has gone badly wrong but you can't prove somebody guilty beyond a reasonable doubt, that's a question."

ON JANET YELLEN:

WESTIN: No I want your honest answer. If you had been Chair of the Fed would you have done things differently than what's been done?

SUMMERS: I've had a lot of admiration for what Janet Yellen has done and I think it's very hard to try to second guess without seeing the same data flow and full context that the people do. I know at various moments when I've been in office there have been people who were out of office who'd been in office before who had all kinds of comments about what we were doing. And I just knew that if they knew all the things I knew, they'd be saying something different. And I took a vow that while I'd express my opinions on the issues of the day, I wasn't going to second guess what office holders were doing.

But in all seriousness I've got great respect for Janet Yellen--

(CROSSTALK)

RUHLE: What grade would you give her?

SUMMERS: And the job that she's doing.

RUHLE: You'd give her an A? You said I'm living on a campus--

(LAUGHTER)

RUHLE: I'm living on a college campus.

SUMMERS: I've got an answer for this one already. This kind of question comes all the time. I'd give her an incomplete because the term is not yet over. But she's done, as I say, I've got great respect for Janet Yellen.

FULL TRANSCRIPT:

DAVID WESTIN: So now let's turn to Larry Summers. Thanks for joining us. Let me start at what at least for me is the top. We've been reporting for weeks now on volatility in the markets. Pretty much across the board, equities, commodities, debt, everything else. It seems sometimes that there's some volatility in the data as well.

 

I mean what is going on? There seems to be a global slowdown. You are a student of data. You watch all of these data. How bad is it from where you sit?

LAWRENCE SUMMERS: Nobody knows but I think the risks are to the downside. I think you look at the industrialized world and it was OK-ish for the last several years. But that was in part being propelled by emerging markets. And now you have emerging markets submerging.

You have China clearly slowing and China's you know going through an adjustment. Even if they succeed, even if they do everything they want to do which is very much in question. They're going to move from being an investment, capital goods, infrastructure-driven economy to being a consumer service-driven economy. That's not going to be good for people selling products to China.

China put in place more concrete between 2011 and 2013 than the United States did in the twentieth century.

STEPHANIE RUHLE: One more time?

SUMMERS: China put in place more concrete between 2011 and 2013 than the United States did in the 20th century.

RUHLE: So what does that mean? What?

SUMMERS: That means they have invested hugely and they've got a really big backlog, an excess, an overhang--

WESTIN: They can't keep up that pace.

SUMMERS: Of infrastructure. And that pace is coming down. And maybe they will serve each other a lot more restaurant meals. Maybe they will move to provide all kinds of urban amenities. But that's not going to do the same thing for the world's copper producers, or the world's iron ore producers--

RUHLE: OK.

SUMMERS: Or even the world's oil producers--

RUHLE: Then let's--

SUMMERS: As what they used to do.

RUHLE: Then let's take all of this data. Things were OK-ish. Now things are worse with the emerging markets. That's going to affect the developed world. What does that mean for the Fed? What does that mean for this rate hike that the market is so focused on?

SUMMERS: Look I'll leave it to others to predict what the Fed will do.

RUHLE: What should they do?

SUMMERS: I've been very clear. I think that there's no reason to raise rates until you see the whites of inflation's eyes. And I look at the data out there and I don't see inflation as close to the horizon. You know I think there's a lot to be said, it's not the only thing to do, but there's a lot to be said for looking at markets to gauge expectations.

And if you look at inflation expectations, by looking at the KIPS (PH), and looking at the other bonds and sort of working all that out. It's basically saying that for the next 10 years, 10 years, inflation is going to be well below the Fed's 2% target.

RUHLE: But Larry the markets are perverse if you look at the fact that they're addicted to this Fed stimulus. We haven't looked at the fundamental problems around the world because we're addicted to this heroin drip.

SUMMERS: Well, some people would call it that. Other people would say it's monetary policy that recognizes current reality. Current reality is very different than what we've had historically. There are a variety of reasons starting from more inequality, why people are more prone to save now. There are a variety of reasons starting from a slower population growth why firms do less investing than they used to.

Therefore normal interest rates in normal times are going to be much lower than they've been. And so levels of interest rates that have traditionally been very stimulative are going to be much less stimulative going forward.

MEGAN MURPHY: Let me jump in if I can.

RUHLE: Please.

MURPHY: Let me just in with a question. Do you have any concern though about what Janet Yellen has said about running the economy hot? And that by running it hot, by letting unemployment drift below historic norms, that we do run a risk that we'll see an inflation blip and that the Fed will get behind when they need to put the hike in place?

SUMMERS: First I always have concerns. And it's never right to dismiss any of these concerns if you want to form a prudent view. Second I work and live my professional life on a college campus. It's Harvard where the kids are pretty fortunate. I see the kids leaving. It doesn't feel like an overheating labor market to me. A lot more of them are living with their parents after they graduate then used to be the case. That's not the market of an overheating labor market.

WESTIN: And even apart from whether they get jobs, why aren't wages going up?

SUMMERS: Wages aren't going up because the power's with employers. Because they're basically there are more people looking for jobs than there are jobs. And so the power is with employers and they don't have to pay more. I mean in the very few sectors where you've got a shortage, you do certain kinds of software engineering your wage is skyrocketing. Certain very specific groups of craftsman have that character.

But in general because of what technology can do, because our labor is brought into much greater competition with labor from around the world, it's shifted against labor. And that is why we have more inequality. That's also why we don't have inflationary pressure. And for the Fed to pile on, on top of that and try to slow things down right now, I think would be take a real risk.

RUHLE: We've heard from some extraordinary investors who simply think, I'm not saying the Fed is asleep at the wheel but Howard Marks of Oaktree said "the Fed is behaving like they are completely scared. Scared of the markets, scared to do anything and that's reckless." Steve Schwarzman of Blackstone wrote an op-ed for the "Wall Street Journal" over the summer where he said, "the cause of the next financial crisis will be the government, will be regulators."

So there's a big negative sentiment around the Fed's inaction from notable investors. Are they just wrong?

SUMMERS: I think they are. I think that you have to balance the risks. We'd all prefer that the economy was stronger. And that the right thing to do was to raise rates. But wishing it doesn't make it so. You know seven Central Banks around the world in the last few years have followed the reasoning of the people you quote. They said, well things are a bit better and zero's a problem. And so we'll raise rates. And seven Central Banks that raised rates have had to retreat and pull them right back. That's not what the Fed's credibility needs.

But you know Stephanie last May I was on the other side. I thought the right thing to do was to keep rates at zero, which is what the Fed did. But I can see how last May you could reasonably have made the argument that there was growing enthusiasm that we had been at zero for a long time. And it was time to raise rates.

I don’t see how you can look at third quarter growth forecasts that are running at about 1.5%. 1.5% that is pretty close to stall speed. And when you're at stall speed and you slow down, it's not good what happens next. I don’t see how you can look at where we are right now and then say that this is the right time to be hitting the brakes rather than the accelerator.

MURPHY: But then are you saying they've missed the window? And that could have happened, should have happened? Missed the opportunity?

SUMMERS: No I was pretty careful what I said Megan. I said I was against it in May. But I understood much better the argument in May. On balance I still think the risks of tipping the economy into recession and deflation exceeded any benefit that would come from an increase in May. But I can see what the argument is.

In a context of the current volatility, turmoil and uncertainty in the rest of the world, in the context of the current much greater signs of incipient deflation or lowflation in the United States, in the context of the current slowing of growth it's really very, very hard for me to see the argument for locking in a rate increase. But I think the Fed's on the right wicket when it talks about being data-dependent and monitoring the data closely--

(CROSSTALK)

RUHLE: They've always been data dependent.

SUMMERS: The data may come in; the data may come in pointing to sharply rising inflation. And if and when it does, I will be the first to say that it's time to raise rates. But the last time America fought a pre-emptive war in Iraq it didn't work out so well.

RUHLE: Oooh.

MURPHY: Interesting comparison.

SUMMERS: I think a pre-emptive war against inflation right now would be a serious policy error.

WESTIN: I want to turn to Matt with some data from the Bloomberg. But before I do that, let me ask you a simple question. If you had been Chair--

SUMMERS: That does not promise a simple answer.

WESTIN: No I want your honest answer. If you had been Chair of the Fed would you have done things differently than what's been done?

SUMMERS: I've had a lot of admiration for what Janet Yellen has done and I think it's very hard to try to second guess without seeing the same data flow and full context that the people do. I know at various moments when I've been in office there have been people who were out of office who'd been in office before who had all kinds of comments about what we were doing. And I just knew that if they knew all the things I knew, they'd be saying something different. And I took a vow that while I'd express my opinions on the issues of the day, I wasn't going to second guess what office holders were doing.

But in all seriousness I've got great respect for Janet Yellen--

(CROSSTALK)

RUHLE: What grade would you give her?

SUMMERS: And the job that she's doing.

RUHLE: You'd give her an A? You said I'm living on a campus--

(LAUGHTER)

RUHLE: I'm living on a college campus.

SUMMERS: I've got an answer for this one already. This kind of question comes all the time. I'd give her an incomplete because the term is not yet over. But she's done, as I say, I've got great respect for Janet Yellen.

WESTIN: OK so let's get to some data out of the Bloomberg. Matt you've been patient.

MATT MILLER: Yeah because if you look at the data you can look at inflation in terms of CPI, PCE or the breakeven, the difference between TIPS and Treasuries. If you look at the five year level, back in May we were at least, you know, had our head above water here. Because the Fed's target we think is about two percent and we were over that for a few months.

Now we're back down at 1.84% and actually if you look at it from a 10-year basis it's even worse. Let me just pull up the US versus Japan and Europe, actually I have Germany here. But United States we're looking at 1.4% when you look at the 10-year breakeven Japan and Germany obviously much worse, 1.2, 0.8.

But I wonder if, it looks like they could have done it in May but maybe we weren't really there yet as far as the increase.

SUMMERS: Matt you've got to recognize that this is a little technical but there are two different price indices. There's the consumer price index and there's the so-called personal consumption expenditure deflator. Which is the one, for a variety of technical reasons, the Fed has chosen as its price index. The second one runs 30-40 basis points south of the first one. So when you see 2, you should hear 160 or 170. Once you do that it's very hard to see a case for raising rates now.

And you make an important point, which is that the case for raising rates, if there is one and Stephanie you were trying to use various investors to make the case. Is a case around accelerating inflation expectations and stopping it. But you've got your Bloomberg graph there and it speaks very clearly. That inflation expectations aren't just not rising, they have fallen significantly since May. And by the way, since May it's not like oil prices have particularly fallen. So that's not just some kind of commodity thing.

You look at the last employment report, no wage growth. No wage growth plus some productivity growth means if anything, deflation. That's not really where we are right now but I think you've got to have a data based case for acting. And the case now is a theory-based case based on the Phillips Curve theory which has been a pretty dismal predictor of events for a long time.

And based on a kind of grand mean reversion theory that interest rates have been below what used to be normal for a long time and therefore things have to get back to normal and all of that. I think that the idea that by raising interest rates we can make things OK is like the idea that by leaving your raincoat at home, you can avoid rain. You wish it were so. You wish there wasn't going to be rain and you wish you didn't need your raincoat. But that's not a reason to leave your raincoat home.

And the hope that the economy would be stronger and would function well at more normal interest rates isn't a reason to raise rates.

RUHLE: All right surprise, surprise. The Bloomberg Terminal is (INAUDIBLE) with questions. We have questions coming in from Twitter. (TWITTER:) Would more deficit spending help the economy?

SUMMERS: Yeah turn from monetary to fiscal. Sure it would. Sure. Have you guys been through LaGuardia Airport?

(LAUGHTER)

RUHLE: I have.

WESTIN: Sadly.

SUMMERS: It's a disgrace. It's embarrassing. It is a disgrace. And it's not an isolated disgrace in terms of our country's infrastructure. Look at Kennedy Airport and look at almost any place you fly to from Kennedy Airport. What would you think about a time when the short-term interest rates was zero and the long-term interest rates was 3% on a currency we print ourselves for 30 years? What would you think about a time when a fraction of men with less education who are working is less than it's been any time in a quarter century except for the height of the financial crisis?

You would think that that was a good time to be rebuilding America. To be renewing our infrastructure. And yet, and yet if you look at federal infrastructure investment, taking out depreciation, it is essentially zero and lower than it's been any time since the Second World War. It is madness not to be investing more in our public infrastructure.

By the way there's studies in Massachusetts and I'm sure there's studies like this in New York that we are all paying the equivalent of a dime or more a gallon in a kind of tax from the extra repairs our cars need because the roads are not kept in reasonable repair. And there are potholes.

So I think there's a compelling case for more public infrastructure investment. And I think there's a compelling case for doing things that will enable and encourage private infrastructure investment.

RUHLE: Larry I want to turn to China. But before we do, I want to get to our own correspondent in Hong Kong, Shery Ahn.

(BREAK)

WESTIN: Thank you very much. So let's come back to China if we could. We started talking about it a bit. Larry you were saying you believe there is a slowdown at least of the rate of growth in China. How confident are we of the numbers? Do we know really, do we have insight into what's going on in the Chinese economy that you rely on?

SUMMERS: You shouldn't be completely confident of the numbers in any country. And you probably should be less confident of the numbers in China. So much has changed that having a statistical system in China that keeps up with everything would be a very difficult task at the best of times. And China is probably has a less independent statistical system, just like it has a less independent Central Bank.

RUHLE: Everything system.

SUMMERS: Than many other countries. And there are various people who watch closely, the different kinds of indicators when you see GDP go up fast and you see electricity production go up slow, that could be because phenomenal increases in energy efficiency are taking place. Or it could be because the GDP statistic isn't exactly right. And there are probably some elements of both.

So my guess, reading the literature on this and talking to people who track the indicators on a weekly and monthly basis, is that growth in China is probably running slower than the official statistics, if that growth were measured in the way that we measure growth here in the United States. But they're still growing at rates that are substantially more rapid than Europe or Japan or the United States.

RUHLE: Then do you have the concerns you had just a few months ago? In April when you wrote that "Washington Post" op-ed you started with, "This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system."

This was really your take on the growth of China and what it looked like in response to the United States. Do you still feel like we're in that same scenario given the slowdown?

SUMMERS: I was just starting to say I think that China growing slowly is still growing more rapidly than the industrialized world growing fast. The particular column that you're referring to was actually less about China's growth exceeding ours than it was about China setting the cadence in terms of international economic integration and international financial institutions.

And I thought, as I still think, that that period when China proposed a new international institution, the United States appeared to be opposed to the creation of that international institution. And the nations of Europe led by our staunchest ally, the United Kingdom, all fell in line behind China. I think that was something you have to stand up and notice as an American.

Now you know there's plenty of room for debate and discussion as to just what the right posture was for the United States. Just where the United States was. But I think we allowed an appearance that was unfortunate in which we seemed to be trying to get the world to go in one direction and then not just were there people who went in the other direction, but they were led by Britain.

MURPHY: Yes they certainly were. And on this issue of, I wanted to turn back to your issue about the numbers.

SUMMERS: Yeah.

MURPHY: If it's at 6.8, if it's at 6.6, if it's at 6.3 in terms of growth, are we too fixated on that number? Are people too following that as their indicator as you point out it is growing so much more rapidly. Has this become the statistical obsession with China's growth rate, has it distracted us from this larger issue?

RUHLE: The good news here Larry you have time to think about this because we have to go to commercial.

WESTIN: We're going to come back to that.

RUHLE: Think for a moment and we're going to have Larry's answer when we return.

(BREAK)

TOM KEENE: We look at the "Financial Times" op-ed recently, this goes back to August where Professor Summers talks about the theme of the moment, secular stagnation. And looking at price change which is the debate right now, CPI inflation excluding energy and core, we call that core CPI. It's difficult to measure housing right. It's less than one percent. Market based measures of expectations suggest that over the next gazillion years inflation will be under two percent. If the currencies of China and other emerging markets depreciate further US inflation will be even more subdued.

Do the models that you and others are working under, the dated models of years ago; can you use them today given low inflation? Or does Janet Yellen, Mario Draghi and others do they have to invent a new framework?

SUMMERS: I think we are to some extent in uncharted territory because of how long we've been at zero interest rates, because of low soft economies have been. You know we used to think that the business cycle was a cycle. And that sure things went down but then it came up to--

KEENE: They always came back.

SUMMERS: Then it came up to normal. But what is one of the main and painful lessons of this last period is the idea of what economists call hysteresis.

KEENE: Yeah.

SUMMERS: The idea that something is history-dependent. And so when you come down you don't really come back up. And what we've seen is that the economy is now 10, 12% below in 2016 what we thought it would be in 2015, 7 or 8 years ago.

KEENE: Right. Larry your critics say that it's a defeatist attitude, secular stagnation. And the idea that there still is an American exceptionalism. A lot of that started at your Harvard. Do we still have that American spirit and can it allow for a cyclical and truly secular (INAUDIBLE)?

SUMMERS: Look I'd rather be playing America's hand than that of any other country in the world. If you look at what we're doing with our energy resources. You look at our great universities. You look at Silicon Valley. You look at a basic resilience of the United States we've got deep, deep structural strengths. And that's a huge thing. But it's not a huge thing that carries you through macroeconomic and financial difficulty. The United States has huge structural strengths in 1928 but that didn't stop a very painful decade from following.

So I think we've got to be focused on making sure that we're doing everything we can to grow this economy. I talked before about public investment. There's also a lot we can do to spur private investment. And I mean government does need to recognize that confidence is the cheapest form of stimulus.

RUHLE: All right Larry you mentioned your Harvard. Your Harvard is doing a lot of extraordinary things but in terms of Harvard's endowment, Harvard's investment team, those are the highest paid among endowments out there. Their performance does not reflect that. What is going on up there?

SUMMERS: Well, I no longer have responsibility for the performance of Harvard. I'm a Professor on the faculty. But as a Professor on the faculty I have of course looked at the returns. And University would be much more affluent if the endowment had performed as well as those of the other major Ivy League schools.

MURPHY: Look at Yale.

(CROSSTALK)

RUHLE: Princeton and Yale crushes it.

SUMMERS: Yale or Princeton.

RUHLE: Matt I want you to pull up the Bloomberg (INAUDIBLE)--

WESTIN: It's not just the performance of what you have but what you're getting contributed. And Harvard's done pretty well at getting new contributions.

SUMMERS: Oh Harvard's done terrific at getting--

WESTIN: They're making it up on the contributions.

SUMMERS: Harvard's done great at getting contributions. President Faust has done a wonderful job leading in Harvard being able to name its engineering school in a very major way--

(CROSSTALK)

RUHLE: OK but the punchline Larry, you bring that money in and it should--

SUMMERS: Name its public health school. But--

RUHLE: Be invested and you should do well. What are they missing?

SUMMERS: I'm not close enough to it to know. I do know that the difference between their performance and Yale's performance would have been billions of dollars. But Harvard's management company has new leadership. And that new leadership I think has an awesome responsibility to the university.

KEENE: Can I tell a personal story here?

RUHLE: Please Tom.

KEENE: One of the treasured family photographs is one Lawrence Summers walking into the Harvard Commencement with the oldest Harvard graduate who was my uncle.

SUMMERS: Oh that's a great story!

KEENE: Great-uncle whatever. He was 103 years old, Phillip Keene. This was years ago Larry I'm sure you remember the day if not my uncle.

WESTIN: When Larry was President?

KEENE: But the idea of institutional money Larry comes down to the desperation for a return. Within your new secular stagnation, within the challenges the nation has, is it a single digit world and the desperation for alternative investments isn't going to work out. We're all going to go back to clipping bond coupons like my uncle did, my great-uncle did 70 years ago.

SUMMERS: I don't think we're all going to go back--

KEENE: We're not going to go back to three percent?

SUMMERS: I don't think we're going to go back to clipping bond coupons. But look there's no question in a world of zero percent T-bills the returns that investors can expect to earn are lower than they were when the base interest rate was 4% or 5% or 6%.

KEENE: Larry, did you ever walk into the president and say, good morning sir, we have negative interest rates?

SUMMERS: Well, I certainly walked in and said we have zero interest rates. And those zero interest rates are a sign of these various developments that we've been talking about. A lot of people who want to save. And not that many people who want to invest.

RUHLE: All right Larry we know what Tom is reading this morning. How about you?

SUMMERS: I've spent time reading the IMF's World Economic Outlook. And it is--

RUHLE: Exciting stuff.

SUMMERS: Yeah well, it is sobering stuff.

RUHLE: Right.

SUMMERS: That I can tell you. I mean they warn of the possibility of a global growth recession in 2016. They express concerns about risks in most places it seems. And I think they very much have a sense that I share that you can't focus on everything. And that the primary focus for policy has to be on growth going forward.

KEENE: Right. Professor we're dealing with this and within the outlook, the blue book, the green book, and the maroon book, we're looking here as Willem Buiter just said moments ago, the idea of a new mediocre, the Summers' secular stagnation and the recession that Buiter is talking about. But we're doing it within financial stability.

Buiter is concerned that there could be instabilities ahead which is why we can't raise rates. Do you agree there is a risk of financial instability and that Chair Yellen has to stay on the zero bound for months and quarters if not for the next year?

SUMMERS: Look the answer to all questions that begin is there a risk, is yes. I made clear that I think the balance is that this is not the time to raise rates or to commit to a rise in rates. On the other hand if we started to see inflation accelerate I think the right and responsible thing to do would be to raise rates quickly. And I don't think there's something in the financial system that would be a bar to raising rates.

I think there are a lot of issues going forward for the financial system. The shadow financial system, how we're going to deter misfeasance which I don't think the world has quite figured out yet. There are issues of liquidity. There are many issues. But I think at the same time it's important to remember that some very important things have been done to make the financial system more stable.

WESTIN: So Tom Keene thank you very much for joining us with the Morning Must Read.

KEENE: Sure.

WESTIN: And Megan and Larry please stay with us.

(BREAK)

WESTIN: So Larry this is a hot topic whether there should have been criminal prosecutions. Do you have a view on this having been there?

SUMMERS: Look I share Ben Bernanke's outrage. There clearly were a lot of outrageous things that happened. If there were people who could plausibly found guilty beyond a reasonable doubt, they should have been prosecuted, rather than their companies being prosecuted.

Whether there were such people and prosecutors just didn't pursue the case or whether in extremely complicated situations you know that something has gone badly wrong but you can't prove somebody guilty beyond a reasonable doubt, that's a question. And that's not something I feel able to evaluate from the outside.

But yes you look at what happened. You look at the degree of irresponsibility of individuals. And I think it's a pretty hard to thing to defend.

MURPHY: You've hit the quandary right on its head. When we're looking back at the crisis and what happened and what caused it, it's incredibly difficult to single out bank chief executives, very senior members of the board for specific decisions which caused a Lehman, which caused the crisis as we saw it.

The crazy thing is what we're seeing now, sort of 5, 6 years later is the manipulation that went on in those markets at the time. We've now found that so many different markets from Libor to FX to we're looking at commodities right now--

RUHLE: Silver.

MURPHY: Silver exactly.

WESTIN: Where there have been criminal prosecutions.

MURPHY: Where there have been criminal prosecutions but there it's so much easier to pick out the single individuals at fault, at blame. They have the emails, they have the chats--

RUHLE: Hold on. The people they keep going after are mid- and junior line guys.

MURPHY: Agreed.

RUHLE: Where these decisions are not made by them.

MURPHY: I completely agree. But have they found in any cases, they found it very difficult to chase up the chain to a wider level. Now if you look at some of the worst behavior whether that's a BNP Paribas with sanctions that was systemic. If we look at what happened with some of the Swiss banks, UBS and Credit Suisse and sort of systemically shielding US clients from tax supervision for lack of a better word. That I think is a very different situation.

But I think it is very difficult, to your point, to go back to sort of the issues that happened in the crisis. It's such a broad level across the system and say, Jamie Dimon, was the executive at the time.

WESTIN: And there's another level that Larry also points to which is the practical level. In the end you have to get 12 people, a jury of your peers, in the Southern District of New York and all that (INAUDIBLE) you put them up in a complex financial case and try to--

MURPHY: Don't underestimate juries. Don't underestimate juries. We just got Tom Hayes in the UK. I agree but I always get juries--

WESTIN: The UK is a very different system than the United States. And as a practical measure, if you look at the track record in complex financial cases of getting a conviction.

MURPHY: Terrible, abject.

WESTIN: It is really hard.

MURPHY: Absolutely shocking. I am shocked to the gut. I was shocked as you when they prosecuted Tom Hayes and that they got a conviction. But don't undersell juries. In my experience, having covered, in the UK, for seven years doing complex criminal cases, more often than not the jury got it right. And these are cases that run on for a year, for two years. And I think we have to understand that these cases are complex, it's a lot of money, it's a lot of time. But we have to send the signal of how important these prosecutions are to make people feel confident in the stability of the financial system and the integrity of the financial system. And to have people renew confidence in the sector that's been battered for so long.

SUMMERS: We also have to hold people accountable for their supervision. Or for their non-supervision when there are these very serious problems. I mean individual accountability is a spectrum. It's criminal at one end. But you know stupidity is not a crime. And you can't prosecute people for stupidity. But you can fire them for stupidity. You can shame them for stupidity. You can make that clear.

And I think looking back it's a reasonable question whether there should have been more rapid and more embarrassing turnover on the boards of some of the institutions. Whether there should have been more turnover and accountability. And it may well be that there are cases that should have been prosecuted but were not prosecuted.

But I would caution that you do have the guilty beyond a reasonable doubt standard.

WESTIN: Unanimous.

SUMMERS: And there's some people who have leapt to the conclusion that because a lot of really bad things happened there must have been crimes. And there might have, the crime might have been stupidity. And that's a different thing.

MURPHY: Let me ask you, what about when you see a sort of $9 billion penalty on BNP Paribas for long-term systemic evasion of sanctions. Do you think that's fair in terms of putting those at an institutional level to send a message across the market? I mean that is a case where you think shouldn't we have had a prosecution of sort of senior level? Is that something that people, are we sort of letting some big financial institutions off the hook because we're concerned about the risk that may pose--

RUHLE: Megan do you think it was only banks?

MURPHY: Absolutely not.

RUHLE: How about all those bartenders in San Diego who said I'm going to lie on my mortgage application because I want to go from living in an apartment with three roommates to a $2 million Southern California house.

SUMMERS: Here's the problem. Yes, yes. I would like to see more individual accountability. And when you have these things that are fairly pervasive you sense that there must be some senior individual who was fairly accountable. And yes that's, I don't know the internal details of that situation. But I share very much your suspicion.

But here's the other thing you have to remember. What comes with those $9 billion fines and the deferred prosecution agreements that everybody is worrying about, is a complicated and serious ongoing go forward monitoring program. And a sword of Damocles over the company. Those things aren't perfect, those things are flawed. But if you just--

MURPHY: But does that sword of Damocles ever fall?

SUMMERS: But if you just prosecute a bunch of people who had resigned from the company four years ago, you have less leverage with respect to the go forward behavior of the company.

MURPHY: I think you have greater confidence than I do in banks continual forward looking ability to monitor behavior. Wherever people clamp down on risk, clamp down on risk-taking, clamp down on sort of egregious behavior, it seems to have just migrated to another area. And it's an ongoing battle. And this is not a criticism. This is just the nature of this game.

SUMMERS: It is a criticism. It is directly a criticism and I think it's actually a valid criticism. And the question is what's the best thing to do. And I guess my view is that you need a multi-part approach. You do need more individual accountability. You certainly need an end to what Eric Holder I think called "too big to jail" to be over. But I think that you also need to do things to preserve your leverage and institute monitoring for these institutions where there have been serious problems.

That's not a substitute for individual accountability. But if all you have is ex post individual accountability, I think you're going to lose some of your leverage on these problems.

RUHLE: All right Larry I have to just cut you off. We've got to move on, we're running out of time and I've got to play up or down with you. Are you ready? This is what you need to tell us, a year from now US dollar, up or down?

SUMMERS: Up.

WESTIN: OK next one, WTI Crude oil price up or down a year from now?

SUMMERS: Up.

RUHLE: S&P 500?

SUMMERS: Up.

WESTIN: Wow. Ten-year Treasury yield?

SUMMERS: Flat.

WESTIN: US unemployment?

SUMMERS: Constant.

RUHLE: Constant. I've got to ask you one that's not up or down. Norway just tapped their 820 billion rainy day fund. Abu Dhabi is starting to sell some of their state-owned entities. Is this a shift, the fallout we're seeing from the drop in oil prices? Are we going to see this in a much bigger way? This is dangerous stuff.

SUMMERS: If oil prices stay down, sure.

RUHLE: Really? How deep could this go? How bad could it get?

SUMMERS: It depends on what happens to oil prices. But you know people accumulate reserves for rainy days. If you're an oil producer and the price of oil is $40 a barrel; it is a rainy day. That is when you're supposed to use your reserves. And they will.

I'm not sure that it is necessarily with such dire and systemic consequence for the financial system. But yes I think that is something that's likely to happen.

WESTIN: OK one last one. A year from now Fed rate above or below 50 basis points?

SUMMERS: Below.

WESTIN: Below?

SUMMERS: At or below.

WESTIN: At or below.

RUHLE: You had said earlier the data is making you more concerned than less. How bearish are you?

WESTIN: On a scale of 1 to 10.

RUHLE: On a scale of 1 to 10.

MURPHY: On a grade of A to F.

WESTIN: And being totally bearish.

SUMMERS: 10s totally bearish. I guess I ask people these 1-10 questions all the time. So I can't really object if you ask it, 6.

RUHLE: 6 he says 6. I'm worried.

WESTIN: OK big thank you to Larry Summers and to Megan Murphy, thanks for being here.

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